Answer:
$301.23
Step-by-step explanation:
We have that the function of wealth is U (w) = w ^ (1/2)
So, since what you have at the start is 100, we replace:
U (w) = 100 ^ (1/2)
U = 10
Now we have two cases:
the first one we win, then the winnings would be 100 minus the cost of the lottery, that is 36 and to that add G of the prize:
100 - 36 + G = 64 + G
In the second case, where we lose, the subtraction of 100 that we have minus the cost of the lottery would be equal 36
100 - 36 = 64
Therefore, we have to win with an 18% probability, therefore losing would be 82% (100% - 18%)
0.18 * (64 + G) ^ (1/2) + 0.82 * 64 ^ (1/2)
solving:
0.18 * (64 + G) ^ (1/2) + 6.56
Now this is equal to U which is equal to 10:
10 = 0.18 * (64 + G) ^ (1/2) + 6.56
(10 - 6.56) /0.18 = (64 + G) ^ (1/2)
(64 + G) ^ (1/2) = 19.11
(64 + G) = 365.23
G = 365.23 - 64
G = 301.23
Therefore, the smallest G prize size that the lottery will be willing to buy is $ 301.23
